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Changing from No to Yes

I recently changed course and invested in a (unnamed for the time being) green energy-related company. I see all sorts of startups related to green energy, all of whom previously got a thumbs down. Most often the no is on the team or on capital inefficiency questions, just as in any other sector.

I had seen “X Company” present at angel meetings or conferences three times before, and I never regretted passing on them. So what changed my mind and got me to invest? In this instance, there were four things: personnel, a recommendation, addressable market opportunity, and traction.

Let’s take them in order.

Personnel

As you know from earlier columns like Why I Invested in CardMunch, I’m big on CEOs with previous entrepreneurial experience, especially if successful. Having started a company myself (without previous entrepreneurial experience,) I know the limits of a founder’s interests and competencies first hand, and I was happy to give up the reins at eSecLending to others better suited for the CEO slot while I focused on my twin loves, the product and the customer. So it was a very positive sign last year at a conference when two local companies, including X Company, spoke about how founders stepped aside to bring in industry-experienced CEOs. However, I still wanted to observe the new X Company’s new CEO (let’s call him “Tom”,) before re-considering the question. My initial impressions were positive, but the company had been missing targets, and I was in no hurry to revisit studying the company, even though it appeared that the company had “best of market” products.

In subsequent impromptu times bumping into Tom, he was always matter of fact, straightforward, and quietly positive, without scaring me away with aggressive projections or hype. My impressions were not enough to get me to revisit the company, but still filed away in the plus column. He seemed to me like Mark Jackson, the old point guard for the New York Knicks. Never flashy, looking out for the team rather than his own stats, and someone you felt comfortable with handling the ball when the press is on.

Recommendation

One of my favorite angels, Michael Mark, advised me “Never invest in a company just because someone else does.” Of course, the list of investors has some importance and is a good indicator of deals I want to look at more closely. But as I wrote in Why I Passed On a Hot Startup, it’s important to me only as a first screen. However, another angel I have co-invested with wrote to the members of two angel groups with an open letter about why he had decided to join in the current round being raised for the company. He too had seen the company before, and he remarked on its progress, giving specific thoughts on everything from momentum to projections to valuations. The angel’s careful due diligence, including talks with two customers, changed me from the “not even interested in hearing about it” column to “I need to learn more” camp. And the roadmap he laid out, once I verified it myself, ultimately proved persuasive.

I want to note that in any angel group there are investors I respect who I think are just crazy to make a certain investment. And I’m sure there are a few clunkers in my portfolio others have the prescience to run away from, that I just haven’t seen yet or that I invested in anyway for non-economic reasons. So this wasn’t a case merely of “’Ralph’ is in, I should look.” The clarity of the angel’s reasons, the reasonability of his assumptions, and his third party perspective as one who I trust to do careful due diligence got me over the hump of indifference.

Total Addressable Market

Yes, we know there is a growing market for all things green. But that was foreseeable long ago. What’s different now for X Company is how their product can be adapted for multiple large markets. This was new to me, and this was a positive. Some components are still being developed, which is one reason the company is raising fund, but the larger TAM is part of a truly global opportunity that can drive X company from modest revenues to a $50mm+ revenue growth company; the new enterprise will be a good fit for a number of major strategic or financial buyers.

Traction

Mark Suster says to invest in lines, not dots. And watching those lines go up means you’re seeing traction in action. The best form of traction is sales, and the company has that kind of traction. The company’s order backlog is many times bigger than a year ago. (Hopefully that’s more a reflection of demand than production bottlenecks.) And what won me over was learning of a new pilot project with a very big, well-known customer that has 6 more similar large projects in various stages of advancement. Should X Company be able to delight this giant with their product and service, “same store sales” alone with this customer would be sufficient to meet the bulk of their revenue projections in the next few years. Even better, it should get them “into the club” of large, legitimate, established vendors to not just the US, but global market. Landing a respected, referenceable giant account is everything to a startup. I don’t invest in food products, but if someone can talk about a successful product with Whole Foods, they may have something. I’ve seen this movie before: my company, eSecLending, owes it success to its founding client, CalPERS. This could be a similar big milestone for X Company.

Summary

Sometimes it only takes one small difference to get someone off the fence. But I wasn’t even close to that position. I was way on the other side of the fence, with no urgency to look over it. In my case, it took four changes, but my turnaround on X Company shows that even old cranks like me can be converted.

What should companies do? If you get feedback from angels on why they say no, don’t just argue, but think about what they are saying. I admire persistence from new company CEOs, but in this case, it wasn’t a matter of persistence of bugging me that my logic in saying no was wrong, but rather getting into the tough business of actually building the company, making changes where necessary, and showing progress. That, and not fundraising, is 80% of the game. Then add a little luck.